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y 



94th Congress \ 
2d Session J 



JOINT COMMITTEE PEINT 



THE FAST BREEDER REACTOR DECISION: 

AN ANALYSIS OF LIMITS AND THE 

LIMITS OF ANALYSIS 



A STUDY 

PREPARED FOR THE USE OF THE 

JOINT ECONOMIC COMMITTEE 
CONGRESS OF THE UNITED STATES 










APRIL 19, 1976 









Printed for the use of the Joint Economic Committee 



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WASHINGTON : 1976 



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JOINT ECONOMIC COMMITTEE 

(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.) 

HUBERT H. HUMPHREY, Minnesota, Chairman 
RICHARD BOLLING, Missouri, Vice Ch air man 



SENATE 
JOHN SPARKMAN, Alabama 
WILLIAM PROXMIRE, Wisconsin 
ABRAHAM RIBICOFF, Connecticut 
LLOYD M. BENTSEN, Jr., Texas 
EDWARD M. KENNEDY, Massachusetts 
JACOB K. JAVITS, New York 
CHARLES H. PERCY, Illinois 
ROBERT TAFT, Jr., Ohio 
PAUL J. FANNIN, Arizona 



HOUSE OF REPRESENTATIVES 
HENRY S. REUSS, Wisconsin 
WILLIAM S. MOORHEAD, Pennsylvania 
LEE H. HAMILTON, Indiana 
GILLIS W. LONG, Louisiana 
OTIS G. PIKE, New York 
CLARENCE J. BROWN, Ohio 
GARRY BROWN, Michigan 
MARGARET M. HECKLER, Massachusetts 
JOHN H. ROUSSELOT, California 



Jerry J. Jasinowski 

LOUGHUN F. MCHUGH 



William R. Buechner 
Robert D. Hamrin 
Ralph L. Schlosstein 



John R. Stark, Executive Director 

Senior Stajt Economists 

William A. Cox 

John R. Karlik 
Courtenay M. Slater 
Richard F. Kaufman, General Counsel 

Economists 

Sarah Jackson- 
George R. Tyler 



Lucy A. Falcone 
L. Douglas Lee 
Larry Yuspeh 



Minority 
Charles H. Bradford (Senior Economist) 
George D; Krumbhaae, Jr. (Counsel) M. Catherine Miller (Economist) 

(n) 



LETTERS OF TRANSMITTAL 

April 16, 1976. 
To the Members of the Joint Economic Committee : 

Transmitted herewith for the use of the Members of the Joint 
Economic Committee and other Members of Congress is a study en- 
titled ; 'The Fast Breeder Reactor Decision: An Analysis of Limits 
and the Limits of Analysis/' prepared for the Joint Economic Com- 
mittee. The study evaluates the major cost-benefit analyses, which 
review the benefits of developing and introducing commercially the 
Liquid Metal Fast Breeder Reactor. 

Hubert H. Humphrey, 
Chairman, Joint Economic Committee. 



April 15, 1976. 
Hon. Hubert H. Humphrey. 
Chairman, Joint Economic Committee, 
U.S. Congress, Washington, D.C. 

Dear Mr. Chairman: Transmitted herewith is a study entitled 
"The Fast Breeder Reactor Decision : An Analysis of Limits and the 
Limits of Analysis," prepared by Mark Sharef kin of Resources for the 
Future, Inc., for the use of the Joint Economic Committee. This study 
provides a timely analysis of this nation's largest energy research and 
development project. 

Mr. Sharefkin examines the bavsic premises underlying the major 
cost-benefit analyses of the Fast Breeder Reactor. The paper raises 
questions about the cost-benefit analyses' assumptions concerning elec- 
tricity demand, uranium supply, nuclear reactor capital cost differen- 
tials, and discount rates. It also suggests specific ways that conven- 
tional cost-benefit analysis fails to shed light on the crucial breeder 
timing issue. 

The views expressed in this study, of course, are those of its author 
and not necessarily those of the committee, any of its individual 
members, or the Joint Economic Committee staff. 

William Cox and Larry Yuspeh of the Joint Economic Committee 
staff managed and edited this study. 

John R. Stark. 
Executive Director, Joint Economic Committee. 
(in) 



CONTENTS 



Pagt 

Letters of transmittal in 

Point-by-point summary vn 

THE FAST BREEDER REACTOR DECISION: AX ANAL- 
YSIS OF LIMITS AND THE LIMITS OF ANALYSIS 

Introduction 1 

Cost-benefit analysis of resource limits under uncertainty 1 

Uncertainty, heroic assumptions and analysis 2 

The limits of analysis 2 

Uncertainty : Sources and implications 4 

The uranium resource base 4 

Future electrictv demand 8 

The LWR-LMFBR capital cost differential 11 

Cost-benefit analysis of the LMFBR program 15 



Limits of cost-benefit analysis. 



The major LMFBR studies 15 

The range and interpretation of net benefit estimates 19 

The discount rate and the range of net benefit estimates 22 

Toward a broader perspective on the LMFBR decision 22 

The LMFBR timing issue 23 

Conclusion : The purposes and limits of analysis 28 

The range of alternatives 28 

The limits of analysis 29 

Appendix 30 

(V) 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/fastbreactOOunit 



POINT-BY-POINT SUMMARY 

1. xVll of the major cost-benefit studies of the liquid metal fast 
breeder reactor (LMFBR) are incomplete, because they ignore the 
possibility that substantial costs in the form of long-lived radioactive 
wastes and their consequences will be transferred to future genera- 
tions. The nuclear waste question pushes cost-benefit analysis beyond 
its capacity. A new analytical method may be required. 

2. It may be very misleading to jump to conclusions of impending 
uranium shortages on the basis that uranium's reserve-production 
ratio is declining. In 1938, oil's reserve-production ratio was about 12. 
It would have been a serious error, however, to argue that the United 
States would run out of oil in 12 years unless something drastic was 
done. Although oil production has increased at 7.5 percent per year, 
oil's 1974 reserve-production ratio was 18. To argue similarly about 
uranium in 1976 probably is just as wrong. 

3. Major increases in uranium reserve estimates over the past few 
years emphasize the uncertainties surrounding this resource base. 

4. Because uranium reserves are expensive to prove and because 
uranium inventories are expensive to obtain and hold, proven reserves 
and inventories will tend to be low relative to other materials. 

5. Uranium reserves also are low, because, until recently, uranium 
prices were declining. Incentives for exploration and development, 
therefore, have been weak. 

6. The uranium resource analyses exclude consideration of major 
determinants of future uranium resources. They are structured in such 
a way as to impart a pessimistic bias to uranium supply projections. 

7. Projected growth rates of electricity demand are a key to the 
decision on when to proceed with the breeder program. It appears that 
electricity growth rates beyond 1980 may be closer to 2 percent per 
year than to the historical growth rate of 7 percent. With a 2 percent 
growth rate, electricity consumption will be only 3.3 trillion kilowatt- 
hours in the year 2000. compared to projections of as high as 6.1 tril- 
lion in the major breeder cost-benefit studies. Thus the breeder could 
be delayed. 

8. The major reason for slower projected power demand growth in 
the future is that the era of declining electricity prices seems to be over. 
The reasons for the end of declining electricity prices include (1) the 
end of scale economies for power generation. (2) the intensity of 
environmental concern and the internalization of some of the external 
costs of power production, and (3) the recent rapid increases in fossil 
fuel costs and in the capital costs of light-water reactor plants. 

9. The capital cost differential between light-water and breeder 
reactors is a key to the breeder decision. Everyone agrees that the 
breeder's capital cost w T ill be much higher than that of light- water 
reactors, but no one is sure how much higher it will be. If the differen- 
tial is greater than $125 per kilowatt, the KMFBR's electricity will 
cost more than light-water reactor electricity. 

(VII) 



VIII 

10. Many analyses assume that LMFBR capital costs will decline 
with experience (i.e., "learning"). There is not much reason to believe 
there will be any decline, however. Light- water reactor construction 
on the contrary has experienced persistently increasing cost and has 
not displayed a learning-curve pattern. There is not much reason to 
believe that the breeder will fare better in this regard. 

11. Most economists agree that intertemporal efficiency comparisons 
require the discounting of future costs and benefits, but they do not 
agree on what the particular value of the discount rate should be. 
Because the study by Stauffer et al. uses a discount rate for the breed- 
er's benefits substantially less than the 10-percent rate used in the other 
studies, it finds that the benefits of breeder development are quite high. 

12. A problem with all of the breeder cost-benefit studies except that 
by Manne involves their specification of the future alternatives. The 
Mamie study reviews two scenarios of the future — one with a certain 
date for breeder commercialization and one with various possible com- 
mercialization dates with probabilities attached. The other studies 
analyze only one future that assumes certain breeder commercializa- 
tion as of a certain date. If breeder commercialization has benefits, all 
of the studies that analyze one future with certain breeder commer- 
cialization will find that the earliest breeder commercialization date 
will yield the greatest benefits. Because of this characteristic, these 
studies shed no light on the crucial issue of the timing of the breeder's 
development. 

13. If cost-benefit analysis is to be applied effectively to the breeder 
development decision, alternative program timing strategies must be 
analyzed. Indeed, it can be argued that an assessment of such broadly 
defined alternative program strategies is the most important role for 
cost-benefit analvsis to serve. 



THE FAST BREEDER REACTOR DECISION: AN ANALYSIS 
OF LIMITS AND THE LIMITS OF ANALYSIS 1 

By Mark Sharef kin 2 



INTRODUCTION 

The liquid metal fast breeder reactor (LMFBR) program has been 
the centerpiece of our long-term energy supply strategy for more than 
a decade. During that period the widening and deepening of infor- 
mation on this technology has prompted changes in LMFBR program 
focus, strategy, and organization, but the underlying rationale for the 
program has not changed. Program advocates have argued that with- 
out the breeder, uranium scarcity will drive the real costs of producing 
electricity higher over the next half century. They argue that with the 
breeder, we can significantly expand the effective uranium resource base 
and thus postpone for several centuries uranium-related electricity 
cost increases. 

Cost-Bexefit Analysis of Resource Limits Under Uncertainty 

The main vehicle for formalizing and quantifying this argument 
has been cost-benefit analysis. The cost-benefit analyst identifies the 
uncertainties affecting evaluation of the LMFBR program and then 
specifies a consistent framework for LMFBR program evaluation. 
Given any set of assumptions about those uncertain elements, a cost- 
benefit analysis gives a dollar figure — the discounted present value of 
the net benefits to the Nation from successful development of a com- 
mercial LMFBR. 

The methodology of cost-benefit analysis grew up in the evaluation 
of government water resource projects. Critics argue that, even in water 
project evaluation, it is as much a framework for political compromise 
as an objective analytical method. 3 but it seems clear cost-benefit meth- 
ods have at least allowed spectacularly inefficient projects to be iden- 
tified and, on occasion, blocked. 

Are the extensions of cost-benefit analysis required for the analysis 
of the LMFBR program appropriate and convincing: and are the 
analvses themselves likely to be as persuasive? A balanced answer to 
the first of these questions requires a hard look at the way in which 
LMFBR cost-benefit analyses model uncertainty. For. unlike the water 
resource problems where the technologies — of dams and of hydro- 
electric generation — have been either stable or changing fairly pre- 

1 My RFF colleagues Joy Dunkerley and Clifford Russell generously read, and improved, 
a draft of this paper : I lay claim to whatever faults remain. 

3 Research associate. Resources for the Future. Inc. The views expressed here ar^ those 
of the author, and do not neeessar^v reflect the vi^ws of the trustees or staff of RFF. 

* Spe J. Ferejohn, "The Half Emptv Pork Barrel" (Palo Alto : Stanford University Press, 
107.-). 

(1) 
67-3G9— 7C 2 



dictably, nuclear technology in general, and LMFBR technology in 
particular is extremely dynamic. And a careful answer to the second 
of these questions requires a close look at the correspondence between 
the issues that are resolvable by cost-benefit analysis and the issues 
central to the nuclear controversy. 

UNCERTAINTY, HEROIC ASSUMPTIONS AND ANALYSIS 

What are the uncertain elements which must be accommodated in 
an analysis of the LMFBR program ? Since the prospect of future 
uranium price increases is basic to the argument, we must make 
explicit assumptions about the extent of the uranium resource base 
and the way in which that resource base will change over time as 
uranium prices change. Since the rate of depletion of the uranium 
resource base depends upon the behavior over time of the demand 
for electricity from which the demand for uranium is derived, we must 
also have explicit assumptions about the behavior of electricity 
demand over time. Since the computation of a time stream of LMFBR 
program net benefits requires that we know how electricity is being 
generated over that time period, we must effectively forecast techno- 
logical change in electric power generation over it. 

In sum, the list of required assumptions is long and heroic. Given 
any such set of assumptions, we can compute a corresponding net 
benefit figure ; and given any set of subjective probabilities of LMFBR 
commercialization dates, etc., we can compute an expected net benefit 
figure ; but this is not the only way. and perhaps not the most informa- 
tive way, of looking at the LMFBR problem as a decision problem 
under uncertainty. Because of the very long time period involved, the 
absolute net benefit figures are so sensitive to the chosen value of the 
social discount rate that an all-or-nothing LMFBR program decision 
based upon a net benefit estimate seems almost reckless. 

But there is another way to use cost-benefit analysis in guiding 
LMFBR decisions. Instead of casting the LMFBR problem as one 
of "to have or not to have an LMFBR." net benefit estimates can be 
used to evaluate alternative LMFBR development strategies, with the 
overall social evaluation of the program left to other, broader devices, 
including legislative decision. We believe that the character of the 
uncertainties listed above — and discussed below in the section, "Uncer- 
tainty : Source and Implications" — suggests such an approach. Fur- 
ther, posing the LMFBR question this way brings to the fore the 
issue of the timing of LMFBR commercialization. 

The Limits of Analysis 

LMFBR program analyses have been built upon the analysis of 
uranium resource limits. Cost-benefit analysis has its limits as well. 
These are limits on the kinds of questions it can answer and the kinds 
of questions it must neglect and leave to other decision mechanisms 
and procedures. First among these is the question of the distribution 
of costs and benefits. In principle the distribution of costs and benefits, 
both interpersonally and intertemporally, can be computed, but good 
cost-benefit analysis makes no pretense to competence in choosing 
among alternative distributions of costs and benefits. 



Among the most serious problems of nuclear power is the possibility 
that substantial costs, in the form of long-lived radioactive wastes, 
wil be transferred inequitably and incompensably onto future 
generations. None of the major LMFBR program studies examined 
below, in the section entitled "Cost Benefit Analysis of the LMFBR 
Program," attempts to quantify these costs. Had they been quantified, 
many people still would balk at discounting them back to present 
values. The procedure seems unfair, and that impression can be given 
a rigorous formulation. Though we will not explore the question, the 
point is clear : "We have reached the limits of analysis, or at least of 
this kind of analysis, and a different sort of analysis is required for 
thinking about these problems. 

This second level of analysis is explored in a concluding section, 
"The Limits of Analysis." Short of analysis at this second level, 
we believe that LMFBR program analyses are likely to remain 
unpersuasive. 



UNCERTAINTY: SOURCES AND IMPLICATIONS 

We have identified the sources of uncertainty in the economic analy- 
sis of any technology, such as the LMFBR, intended as an offset to 
cost increases for exhaustible resources. But identifying uncertainties 
is only a first step toward properly accommodating them in an eco- 
nomic analysis, for there are various kinds of uncertainty requiring 
distinct modeling approaches. Our purpose here is a clear understand- 
ing of the character of the major uncertainties in LMFBR program 
analysis, so that later we can see how well these distinctions are cap- 
tured in the LMFBR program studies and how sensitive the conclu- 
sions of the studies may be to the choice of modeling approach. 

The Uranium Resource Base 

The fact of resource exhaustibility seems self-evident. Since the 
earth is finite, resources such as uranium and coal are obviously finite. 
It is tempting and customary to identify that unknown, ultimately 
finite stock of resources using the many presently available measures of 
the size of exhaustible resources, but this temptation should be resisted. 
Proven reserves — particularly of minerals like uranium which are ex- 
pensive to prove — are those amounts that enterprises have found it 
profitable and prudent to "prove," and are more analogous to a firm's 
inventory of some raw material input than to the finite stock of non- 
renewable supplies which textbook economics forces shipwrecked sail- 
ors to allocate over time. Because inventories are costly to obtain and 
hold, no firm will hold an unlimited inventory of any input. The 
amount actually held will be determined by balancing off the benefits, 
such as assurance of supply and continuity of the production process; 
and the balancing of costs, such as the interest or carrying charges on 
the investment represented by the inventory and the costs of storage 
of that inventory. Similarly, no firm will hold infinite reserves of the 
exhaustible resource input. Reserves that are actually proven through 
exploration and to some extent developed to the point of relatively 
ready access will be determined by their value to the industry in re- 
duced uncertainty and supply continuity, weighed against the costs 
of exploration and development required to prove reserves. 

Thus it may be seriously misleading to jump from declines in the 
reserve-production ratio to conclusions about impending shortage. The 
notion that the resource may "run out" in a number of years approxi- 
mately equal to the reserve-production ratio is almost certainly mis- 
leading. In 1938, the reserve-production ratio for oil was roughly 12. 
In 1974, though production increased at roughly 7.5 percent per annum 
in the interim, that ratio had increased to roughly 118. One would have 
been entirely mistaken to conclude, in 1938, that the world would be 
out of oil in 12 years unless "something were done." One would be 
equally mistaken to argue similarly at any other time. In general, 
where a resource is expensive to locate and develop, as in the case of 

(4) 



oil, we expect the optimal reserves held by the industry to be lower 
than in the case of an industry, such as coal, whose reserves are rela- 
tively inexpensive to locate and develop. 

Turning to the case of uranium, it is vital to note the newness of 
uranium as an economic resource and the dominant position of the 
Government on the demand side of the market for most of that short 
history. Relative to the enormous sums expended in the search for 
exhaustible resources, such as oil, which have been of major impor- 
tance in the domestic economy for over 50 years, uranium exploration 
and development is in its infancy. The present 18-month-old program 
to obtain a more definitive assessment of our uranium reserves, the 
Preliminary National Uranium Resource Evaluation Program 
(PXURE) , is budgeted for millions of dollars over its 5-year life. The 
way in which reserve estimates have shifted in the recent past and the 
dramatic way in which they have shifted in the first 18 months of the 
PXURE program are indicators of the uncertainties surrounding the 
assessment of this resource base. 

Table 1 below appears in the AEC's "Proposed Final Environ- 
mental Statement for the LMFBR Program" x (hereafter this docu- 
ment is referred to as AEC (1974) ) and represents the AEC's best 
estimates as of January 197-4, though they are based upon earlier data 
and analyses. Table 2 below appears in ERDA's first published docu- 
ment, "Report of the Liquid Metal Fast Breeder Reactor Program 
Review Group," 2 and represents best estimates as of September 1974. 
Obviously table 2 is more extensively differentiated and more informa- 
tive than table 1, but the two are essentially comparable. 

Above we have spoken of reserves as an inventory, but the analogy 
with an inventory of goods on the shelf is overly simplistic and inade- 
quate for real reserve classification. Since exhaustible resource reserves 
are costly to "prove," i.e., to establish with reasonable certainty, mining 
firms generally/ will hold a "portfolio" of reserves proven in varying 
degrees of certainty. In recognition of this important distinction, 
AEC data differentiates 3 "reserves" (referred to as "identified" in 
table 2) from "potential reserves." Reserves include only uranium in 
known deposits, for which the quantity, grade and physical character- 
istics have been established with reasonable certainty by detailed sam- 
pling, and which these tests indicate can be recovered at costs less than 
or equal to an assumed price level. The AEC "reserve" figure is there- 
fore what elsewhere is called a proven reserve figure. The AEC reserve 
estimates in this category are relatively uncontroversial, and one writer 
on uranium resource problems suggests that the AEC reserve category 
be understood as "reasonably assured resources." 4 Note that the reserve 
estimates of tables 1 and 2 are identical. Cumulative reserves below $30 
per short ton "forward costs" are, in both cases, 700,000 short tons. 5 

1 U.S. Atomic Energy Commission. "Proposed Final Environmental Statement, Liquid 
Metal Fast Breeder Reactor Program," WASH-1535. December 1974. 

a Energy Research and Development Administration, "Report of the Liquid Metal Fast 
Breeder Reactor Program Review Group," January 1975. 

3 For definitions of the AEC categories see AEC, "Statistical Data of the Uranium Mining 
Industry" (Grand Junction, Colo. : Grant Junction Office), June 12, 1974, p. 13. 

* Electric Power Research Institute, "Uranium Resources To Meet Long Term Uranium 
Requirements" (Palo Alto; Calif.: Electric Power Research Institute, November 1974), 
p. 44. 

5 See p. 7 for discussion of the concept of "forward cost." 



The AEC's potential reserve (or potential resource) category 
includes by definition only "conventional" uranium deposits and 
uranium surmised to occur in (1) unexplored extensions of known 
deposits, (2) postulated deposits within known uranium areas, or (3) 
postulated deposits in other areas known to be geologically favorable 
for uranium. In sum, these potential reserves (see tables 1 and 2) are 
resources whose existence is inferred from existing information and 
experience, but not yet confirmed by direct sampling. 

The significant comparison between tables 1 and 2 is between the sum 
of reserves plus potential reserves at $30 per pomid forward cost in 
table 1 — 2,400,000 short tons of U 3 8 — and the corresponding total of 
3,450,000 short tons in table 2. As the footnote on the new total indi- 
cates, the increase of 1,150,000 short tons is entirely due to the results 
of the first 18 months work of the PNURE program. 



TABLE I.- 


-AEC ESTIMATES OF U.S. 


URANIUM RESOURCES 












Cumulative thousands of short tons 


of 


U 3 s 




Reserves 


Potential 




Total 



U3O8 cost up to (per pound): 

$8 280 450 730 

$10 340 700 1,040 

$15 520 1.000 1,520 

$30 700 1,700 2,400 

Source: U.S. AEC, proposed final environmental statement, liquid metal fast breeder program (December 1974), p. 
11.2-67. 



Table 2. — ERDA estimates of U.S. uranium resources 
[Thousands of Short Tons UjOsCl) as of September 1974] 







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3 Short Tons UiQ«=i'18 Metric Tonnos U.}Os = 1000 kilograms uranium. 
2 Ores to grades down to approximately 0.12 r 7 U1O9: approximately '. 5' , from sandstone host rocks. 
(3) Ores to grades down to approximately 0.10 f ^ U3O8, primarily from sandstone host, but including 
small contributions from other host formations such as veins, conglomerates and tuffaceous material at 
grades down to approximately 0.025* [ UjO», where there are sufficient data to judge the possible quantity 
of uranium. 

1 4 The index cost is not the average cost of production. And more importantly, it is not the prce at which 
uranium will be sold. See text for a discussion ol index costs, projected actual costs and prices. 

I : lis is a new total, approximately 1,200,000 short tons U3O8 1 ighei than 1-1-74 estimates, a result cf 
the Preliininary National Uranium Resource Evaluation Program (PNURE), started approximately 
Is mos. ago. 
(6) There are other small domestic sources of uranium: 

200,000 metric tonnes of dt pitted uranium tails, available to stock LMFBRs (sufficient for at least 
2000—1000 Mwe LMFBRs. 
20,000 short tons of U3O5 recoverable from copper ore leach solutions between now and year 3Q60. 
70,000 short tons of U ; 0$ recoverable from phosphoric acid made from Florida phosphate rock between 
now and year 2000. 

2,000-3.000 short tons U3O8 per year by year 2000 from lignite gasification assuming 75% recovery of 
UjOj and 20% of natural gas demand supplied from lignite. (No production now planned.) 

Source: ERDA, Report of the Liquid Metal Fast Breeder Reactor Group (January 1975), p. 16. 

There are other circumstances which reinforce what seem to be the 
optimistic implications of this recent substantial upward revision of 
potential uranium reserve estimates. The behavior over time of uran- 
ium reserves, production and prices seems, in a very rough way, to be 
similar to the pattern typical of other mineral resources, with similar 
implications about fears of exhaustion and of impending rapid price 
increases. 6 The definition of potential reserves is itself fairly conserva- 
tive, with estimates of higher cost reserves and potential reserves not 
encompassing all such resources but only those in presently known 
producing areas and in areas geologically similar to presently known 



8 The AEC source cited in footnote 2 above has time series on reserves, production, and 
prices. 



8 

producing areas. 7 Until very recently, uranium markets have been 
soft, with declining prices, so that incentives for exploration and 
development have been weak. 

Finally, the uranium resource data base, excellent when compared 
to what faces the analyst of other mineral resources, is structured and 
reported in a way that may impart a pessimistic bias to the uranium 
resource picture. Thus the AEC's tabulation of reserves and of poten- 
tial reserves by cost levels indicates the amounts of each of these cate- 
gories presumed to be available at less than certain levels of so-called 
"forward cost," which is the cost of future extraction. This extraction 
cost concept, which excludes past or "sunk" cost, is the economically 
relevant cost concept. But since maximwm forward cost figures are 
used to demarcate the reserv e tabulation, the actual cost of extraction 
for much of the reserve under each cost ceiling is well below the max- 
imum forward cost figure. And since the forward cost intervals are 
stated in current dollars, inflation erodes the better grade resources 
in the lower cost intervals in such a way that changes over time in 
the resource distribution among cost intervals are not good indicators 
of changes in the physical resource stock. 

Thus there are several ways in which the uranium reserve estimates 
may be biased downward. Moreover, the analyses that have been done 
do not get full mileage out of the present data base. They are struc- 
tured in a way which may impart a further pessimistic bias to uranium 
supply projection and which certainly excludes consideration of major 
determinants of future uranium resources. There are ways to bring 
some of the economic incentives that bear on resource exploration and 
discovery into an economic model for forecasting future reserves, but 
I am not aware of any published modeling effort of this kind for the 
American uranium resource base. Such modeling is a difficult task. 
Poor models can and have produced silly results. But present reason- 
ing from "models" which in effect neglect the economic determinants 
of the extractive resource base is almost certainly worse. Thus, an 
OECD model of the uranium resource exploration and development 
process 8 reportedly projects uranium resources larger by a factor of 
15 than present estimates. 

The OECD results suggest that partial models of the future 
uranium resource base may understate that base by a very lar<re 
amount. Moreover those partial models allow only the crudest explo- 
ration of the sensitivity of LMFBR cost-benefit results to resource 
base assumptions. Below we will comment on the sensitivity problem, 
and in our overview of LMFBE, cost-benefit analyses we will set out 
some criteria for the modeling of the uranium resource sector in anal- 
yses of the LMFBR program. 

Future Electricity Demand 

The demand for uranium and plutonium for fueling light water 
reactors (LWE's) and LMFBR's alike is of course derived from the 



7 The traditional AEC "potential" resources category is restricted to "conventional" 
uranium deposits — deposits in sandstone or veins, much like present reserve-category 
deposits. See the discussion in Electric Power Research Institute, op. cit., pp. 46-47. 

" H>re T am reporting the very brief description of results obtained with this model given 
in T. C. Bupp and ,T. Derian. "The Breeder Reactor in the U.S. : A New Economic Analysis." 
Technology Review (July-August, 1974). Reporting the results of a model of this kind at 
second hand is always tricky. Time did not permit me to obtain a first-hand description of 
this model. 



demand for electricity produced by those reactors, and any projection 
of uranium "requirements" depends upon an electricity demand 
forecast. 

Demand forecasting builds upon economic models and economic 
data and is relatively free of the serious uncertainties about the nat- 
ural world that plague resource reserve estimates. But demand fore- 
casts have their own particular uncertainties and instabilities, and 
these can be as serious for LMFBE program analysis as the uncertain- 
ties in uranium resource estimates. 

Although there is a range of demand forecasting methods, that 
range is illuminated by contrasting two approaches. The first amounts 
to simple extrapolation of past consumption trends; we will call the 
second econometric demand analysis. Though different in concept, they 
can give similar results if past trends in economic growth and elec- 
tricity rates are expected to continue. In other cases the results of the 
two kinds of analyses can be wildly divergent. Econometric demand 
analysis yields forecasts based on the separate influences of various 
determinants of demand and therefore is more useful in a period dur- 
ing which those determinants are changing at rates markedly different 
from the past. 

The method of extrapolating past growth means just that. Trends in 
electricity consumption over some past period are summarized in a 
single number — a growth rate ; then ignorance of future conditions is 
recognized by adopting a span of growth rates around this historical 
average. Because the growth rate of electricity demand over the 25 
postwar years. 1915-70, was exceptionally high — roughly 7 percent in 
the 1960's and much higher than that of the economy as a whole — 
the band of growth rates of electricity consumption frequently used 
for projections covers a range around 5 percent or 6 percent, 

There are numerous variations on this method. In one. the growth 
of GXP is forecast, and the ratio of electricity consumption to GXP 
is assumed constant, thereby providing a forecast of the growth rate 
of electricity demand. The kinds of electricity consumption estimates 
produced by this extrapolation method are illustrated by table 3, taken 
from a uranium resource study which extrapolates electricity con- 
sumption based upon "an excellent correlation between real gross 
national product and total electricity generation." For comparison 
with the results of forecasts based on econometric demand analysis, the 
reader should focus on the column headed "Reference based upon 
GXP." in particular the forecasts of 2.9 trillion kWh consumption 
in 1980 and 6.1 trillion kWh consumption in 2000. 

TABLE 3.— ELECTRICITY CONSUMPTION FORECASTS BASED UPON EXTRAPOLATIONS OF HISTORICAL 

CONSUMPTION 

Total (trillion kilowatt hours) 

Reference 
Assumed based on Assumed 

Year lowi GNP higN 

1980 2.9 2.9 2.9 

2000 4.5 6.1 9.2 

2020 6.7 10.6 18.9 

2040 10.0 15.9 38.8 

» These figures lie far outside 3 standard deviations from the reference case. 

Source: Electric Power Research Institute, "Uranium Resources To Meet LongTerm Uranium Requirements" (November 
1974) p. 12. 

67-369—76 3 



10 

In econometric demand and supply analysis, there is an effort to 
identify the causal factors involved in shifts over time in the demand 
for electricity and in shifts over time of the costs of supplying elec- 
tricity. On the demand side, electricity prices and the incomes of 
consumers are typically important variables, and, on the supply side, 
technological change and changes in environmental standards and 
the costs associated with those standards are likely to be significant. 
In a recent report prepared for the Federal Power Commission, 9 
such an analysis gives an estimate of 2.2 trillion kWh for 1980 elec- 
tricity generation, to be compared with the estimate shown in table 3 
of 2.9 trillion kWh for 1980, based on a GNP-related extrapolation. 
Utilitv industry estimates of 1980 generation have been as high as 
3.2 trillion kWh. 

The FPC study makes no estimates bej^ond 1980, but the growth 
rates implicit in its estimates for 1980 — closer to 2 percent per annum 
than to the historical 7-percent rate — will obviously give consumption 
figures for the years 1980-2000 much lower than estimates based on 
extrapolation of history, such as those of table 3, since small changes 
in compound growth rates result in successively larger divergences in 
the estimate over time. With a 2-percent annual growth in electricity 
consumption, for example, a 1980 consumption estimate of 2.2 trillion 
kWh grows to roughly 3.3 trillion kWh by the year 2000. To gage the 
difference between the results of this method and those of historical 
extrapolation, compare the "reference" forecast in table 3 of 6.1 tril- 
lion kWh for the year 2000 and the "low" estimate of 4.5 trillion 
kWh for that year with this 3.3 trillion kWh figure. 

None of this should be surprising to anyone familiar with the 
mechanics of compound growth. The vast range of demand forecasts 
which reasonable demand estimation methods can give is clear. The 
problem for an assessment of the LMFBR is to choose between the 
assumptions which underlie the extrapolation and the demand analysis 
methods and to judge which more appropriately describes the eco- 
nomic environment for the future. The two forecasting methods need 
not give dissimilar results. When relative production costs and prices 
are changing as in the past, and when the economy is expanding more 
or less proportionately across sectors, the two methods should give 
results in close agreement. That they do not concur implies that some 
of these conditions do not hold and is indicative of the superiority, 
for present purposes, of econometric demand analysis. 

The 1960's pattern of rapid expansion in electricity consumption — 
expansion at rates higher than the real growth of GNP — follows a 
pattern observed in several other industries during that period, such 
as data processing, long-distance communications and commercial air 
transportation. 10 All of these industries grew much more rapidly than 
the rest of the economy in the 1960's, and all were the locus of rapid 
technological change during that decade — change which significantly 
lowered the costs of producing and delivering existing services and 
which introduced a wide range of substantially new services. With the 
apparent exhaustion of that burst of technological change, the related 
declines in cost and the supernormal industry growth rates also slowed. 

9 Duane Chapman et al., "Power Generation: Conservation, Health, and Fuel Supply," 
draft report to the Task Force on Conservation and Fuel Supply, Technical Advisory Com- 
mittee on Conservation of Energy, 1973, National Power Survey, U.S. Federal Power 
Commission. 

" I am indebted to Lawrence Moss for this analogy. 



11 

Similarly, electric power costs and prices declined both relatively 
and absolutely during the 1960's, as successively larger generating units 
exploited the substantial economies of scale then remaining in genera- 
tion. For a variety of reasons the era of declining electricity prices 
seems to be over. These include (1) the apparent end of scale economies 
of generation, (2) the period of intense environmental concern and 
the internationalization of some of the external costs of power produc- 
tion, and (3) the recent rapid increases in fossil fuel costs and in the 
capital costs of thermal and nuclear LWR plants. Extrapolation fore- 
casts of power consumption which abstract from these recent changes 
in the price trends are incomplete and subject to the same kinds of 
errors as the extrapolation forecasts of commercial aid travel with 
which the airlines planned their way into the 1970's, only to be left with 
substantial excess capacity. 

In sum, the extrapolation of past electricity demand growth at a 
fixed growth rate is an inferior method of projecting future electricity 
consumption. It probably leads to an upward bias in future consump- 
tion estimates for the next quarter century, and in the estimates of 
net benefits from the LMFBR program. Electricity demand projec- 
tions rooted in a more complete demand analysis not only tend to yield 
scenarios with lower consumption growth rates but, if properly struc- 
tured, also allow additional flexibility and realism in LMFBR cost- 
benefit analyses. We return to these problems in our survey of the 
existing LMFBR studies, and there we will draw some guidelines for 
an adequate projection of electricity demand. 

The LWR-LMFBR Capital Cost Differential 

The rational for the LMFBR program, as noted above, rests on 
the exhaustibility of uranium and other fossil fuels and upon the 
rising market prices that uranium depletion will impose over time. 
Presumably the utilities will begin buying LMFBR's when their elec- 
tricity is economically competitive with LWR electricity, i.e., when 
uranium prices have risen enough to offset the expected higher capital 
costs of the LMFBR. 

Cost analysts are in general agreement that LMFBR installations 
will be more costly than LWR's. For any time path of future nuclear 
fuel prices there is obviously some LMFBR capital cost disadvantage 
at which cost-minimizing utilities will balk at purchasing LMFBR's. 
And the commercial future of the LMFBR therefore rides on the size 
that LMFBR-LWR capital cost differential. Hence, the capital cost 
differential assumption is a key determinant of the results obtained 
by any LMFBR program cost -benefit analysis. 

Unfortunately there is no consensus about the probable size of that 
differential. And the uncertainties surrounding this number are harder 
to strip away than the uncertainties surrounding many other economic 
variables, largely because a major source of uncertainty about nuclear 
capital costs is the lack of consensus on the social acceptability of 
nuclear power of airy kind, and the reflection of that lack of consensus 
in the regulations on the expansion of nuclear power. 

Our experience with LWR capital cost forecasting is directly^ rele- 
vant and instructive here. The rapid and unanticipated increases in the 
capital costs of LWR plants over the past decade are familiar to all 
energy analysts. While in 1965 estimates of $130 per kW were typical 



12 

for large LWR's, capital costs for the 1,000 MWE plants now on order 
and expected to be on line in the early 1980's are being estimated at 
$700 per kW. Some plants scheduled to be on line in the mid and later 
1980's are already being estimated at $900 per kW. The reasons for 
these cost increases are not at all clear, and there is substantial dis- 
agreement implicit in the explanations offered by the principal con- 
cerned parties. 

Some contributing factors are not in dispute. The kind of LWR 
built has changed over time in step with technological improvements 
and with changes in licensing and other procedural requirements, so 
that later and earlier installations are of different kinds, and their 
capital costs not directly comparable. But most other elements of the 
LWR capital cost picture are shrouded in controversy. 

A recent analysis of LWR cost trends u has skillfully summarized 
the depth and breadth of that controversy by highlighting the extent 
to which the AEC and the utilities have developed distinctive and 
opposing views of the capital cost problem. The utility view emphasizes 
changes which have been imposed upon the industry principally in 
response to environmental and safety concerns — the burden of prepar- 
ing environmental impact statements and answering AEC information 
requests, the provision of additional radiation shielding to meet "as 
low as practicable" radiation release standards, and of safety equip- 
ment required by the AEC's upward revision of safety standards. The 
AEC's view has, on the other hand, emphasized production-related 
difficulties — declining construction labor productivity, late delivery of 
major equipment, and legal challenges to plant siting and to regulatory 
practice, the latter often requiring changes in regulatory procedure. 

The authors of this analysis, basing their conclusions on an unpub- 
lished analysis of LWR cost data, offer their own interpretation of 
LWR cost increases. First, the source of the problem can be somewhat 
more precisely located. The constant-dollar costs of the nuclear steam 
supply system itself — the "heart" of a nuclear power plant, built by 
one of the major reactor vendors — have not been increasing; they have, 
if anything, been decreasing. The component of the nuclear power 
plant cost under the control of the architect engineer, who oversees 
the design and construction of power plants built around the vendor- 
supplied nuclear steam system, is almost entirely responsible for the 
big LWR capital cost increases. Those cost increases are, in turn, at- 
tributable primarily to plant changes and delays arising from the 
licensing procedure. 

But it is crucial to recognize that the common interpretation of 
those delays as either the unfortunate result of willful obstructionism 
or the fortunate result of dragon-slaying are misdirected. What really 
matters is that we have no broad consensus on the social costs and 
benefits of nuclear power. Nor have we any decisive consensus on the 
procedures appropriate to establishing those social costs and benefits : 
For weighting claims of distributional burdens imposed upon some 
by nuclear power, for arriving at some overall policy on fission power, 
or, for that matter, on the many smaller decisions which have arisen 
and will arise along the way. 

»I. C. Bopp and J. Derian, "The Economics of Nuclear Power," Technology Review 
(February 1975). 



13 

In this no-consensus situation the evaluation of the social costs and 
benefits of nuclear power is being carried out, de facto, in a variety 
of forums — regulatory, judicial, and administrative — and under a 
variety of arrangements not always suitable for this purpose. But these 
are the only forums and arrangements we have. If one believes that it 
is improbable that a clearer and more definitive consensus on fission 
power will emerge, then there is little reason to believe that LWR 
costs are about to fall, and much reason to fear that present LWR 
cost trends may persist. 

It is against this background that projections of capital costs differ- 
entials between LWR's and LMFBR's should be interpreted. The 
LMFBR's economic competitiveness with the LWR is based upon its 
lower fuel costs, and those fuel costs must be sufficiently lower to off- 
set what almost all analysts believe will be the higher capital cost of 
LMFBR's. It is estimated that, if the LMFBRr-LWR capital cost dif- 
ferential is more than $125 per kW, LMFBR electricity will be more 
expensive than LWR power over the entire "reasonable" range of fu- 
ture nuclear fuel prices. It follows that if the uncertainties in the esti- 
mates of the LMFBR-LWR capital cost differential are larger than 
$125 per kW, the future competitiveness of the LMFBR is uncertain, 
and so are both the magnitude and the sign of the benefit-cost differ- 
ence imputed to the LMFBR. 

Our experience with commercial LWR's is still very narrow and we 
are still unsure of their ultimate capital costs. But it can easily be ap- 
preciated that the situation is far worse for the LMFBR's, where we 
have no commercial experience to draw upon. The Clinch River Breed- 
er Reactor, the first in a proposed series of demonstration plants in- 
tended to bring the LMFBR to full commercial status, now bears a 
capital cost estimate of $3,000 per kW. Clinch River is a one of a kind 
plant and emphatically not a commercial design, so this figure must 
be somewhat discounted, but it is not reassuring. 

So much for the magnitude, character, and importance of the uncer- 
tainties surrounding the LMFBR-LWR capital cost differential. How 
well or badly are these uncertainties mirrored in analyses of the 
LMFBR program ? Cost-benefit analyses typically assume that a high 
initial LMFBR-LWR capital cost differential is gradually reduced 
by learning: That is, that experience with the technology lowers its 
costs so that ultimate LMFBR-LWR capital cost differential falls into 
a range — usually $100 per kW or less — in which the LMFBR is eco- 
nomically competitive with the LWR. There is no question that some- 
thing like this does happen in some industries and for some production 
processes. In a classic example, the cost of assembling a standardized 
airframe was found to decrease with the number of airframes pro- 
duced, the explanation presumably being the accumulation of exper- 
ience by the assembly crews. Unfortunately, the history of LWR costs 
raises serious doubts about the relevance of this kind of learning effect 
to the LMFBR problem. Ten years after completion of the first non- 
turnkey reactors, we have not yet gotten this technology on a classical 
learning curve. The LWR case, in fact, has been a social learning 
process. Over time we have tried to evaluate the social costs and bene- 
fits of the most important new technology of the postwar period. I find 
little reason to believe that the way for the LMFBR has been cleared 



14 

by this experience, and much reason to believe that this newer kind of 
learning effect, not the "airframe effect," will dominate the LMFBR 
commercialization process. I do not believe that present LMFBR pro- 
gram analyses capture this feature of the problem ; below I argue that 
a program analysis can be structured to reflect some of these crucial 
difficulties. 



COST-BENEFIT ANALYSIS OF THE LMFBR PROGRAM 

Our purpose in this section is an overview and assessment of the 
major cost -benefit analyses of the LMFBR program and, in particu- 
lar, an understanding of how well or poorly they come to terms with 
the problem of uncertainty. Beginning with a few comments on the 
general problems of cost-benefit analysis, we then turn to a detailed 
comparative evaluation of the major program studies, and finally to 
ways in which the program analyses can be broadened and improved. 

Limits of Cost- Benefit Analysis 

The principle underlying cost-benefit analysis is simple and unex- 
ceptional. One should not undertake a project unless the aggregate 
benefits flowing from the project can be expected to exceed project 
costs. "Where the budget of the decisionmaker is constrained, so that 
not all beneficial projects can be undertaken, the bundle of projects 
yielding the highest aggregate net benefit within the budget constraint 
should be chosen. 

This principle is relatively easy to apply when the set of alterna- 
tives open is small and relatively well defined, where there is little 
ambiguity and uncertainty on the demand side, and where technology 
is relatively stable. And the cost-benefit analyst's decision rule — 
proceed with the project if aggregate net benefits are positive — is likely 
to be acceptable when the distribution of benefits and costs is relatively 
equitable. 

How many of these preconditions for the accuracy and acceptability 
of cost-benefit analysis are present in the LMFBR case? We shall 
argue below that the answer is almost none. The range of energy policy 
alternatives faced by the Government is very broad, and arbitrary 
constraints of the range of alternatives considered can bias the con- 
clusions of a cost-benefit analysis. "Cost" cannot be correctly measured 
without reference to the correct range of alternatives. Nuclear power 
technology is still developing rapidly and, as we have argued above, 
the cost of that technology is still very much the subject of regulatory 
determination. Central to the arguments against fission power of any 
kind is the fear of an inequitable and noncompensable transfer of costs 
onto future generations. Still, as we shall see below, most of the major 
LMFBR cost-benefit studies are quite conventionally conceived. 

The Major LMFBR Studies 

Cost-benefit analysis of the LMFBR program has become a small 
industry in the past few years, but many of the published analyses 
are updates or revisions, so that it is sufficient to consider five major 
recent analyses. Only the latest of the three AEC analyses published 
during the 5-year period, 1969-74, need be considered here, since the 

(15) 



16 

three differ mainly through updating to incorporate revised and im- 
proved information on costs and technology and in efforts to be 
responsive to critics of the earlier versions. 1 but not in method or policy 
conclusions. Prominent among the critics of the AEC analysis has 
been Thomas Cochran of the Natural Resources Defense Council, 
whose book on the LMFBR program 2 is a lengthy critique of the 
AEC's 1972 update of the 1970 cost-benefit analysis. Professor Alan 
Manne, now at Harvard University, has published several cost-benefit 
analyses of the LMFBR, some of them in collaboration with other 
authors. 3 And Professor Thomas Stauffer of Harvard, H. L. Wycoff 
of Commonwealth Edison Co., and R. S. Palmer of the General Elec- 
tric Co. have published still another. 4 

All of these studies are cast within the usual cost -benefit framework. 
Nevertheless they generate widely divergent "base case" net benefit 
figures for the LMFBR. In gaging the relevance of these conclusions 
for policy, it is important to understand the sources of this divergence. 
First, all of the studies acknowledge the existence of uncertainties in 
uranium availability, electricity demand growth and future LMFBR- 
LWR capital cost differentials, but they differ on the likely range of 
these uncertainties, and on the likelihood of the individual values 
within each range. Each calculation puts forward a "base case" — or 
most probable case — for these uncertain conditions, and the different 
studies put forward different "base cases." 

But even if the authors of all of these studies were in agreement on a 
single base case, their net benefit results would differ for several rea- 
sons. First, in order to compute a net benefit figure for the LMFBR 
program, each study constructs a model of the electric utility industry, 
tracing the expansion of generating capacity to meet base case elec- 
tricity demand over some planning horizon. (Only one of the studies, 
Manne (1973), considers scenarios in which demand is price depend- 
ent ; in all the others, the effects of price changes on consumption are 
subsumed into the growth rate of consumption chosen. Though there 
are difficulties of interpretation involved in direct comparisons of the 
Manne (1973) study with the others, the study results are sufficiently 
important in their implications, for overall energy policy and for the 
interpretation of the other studies, to warrant inclusion here.) There 
is no unique way to model utility behavior, and in choosing among 
alternative models there is a tradeoff between fidelity to detail and 
simplicity affording a clearer understanding of the workings of the 
model. The divergence between net benefit results arising from dif- 



1 Those successive AEC studies are as follows : AEC "Liquid Metal Fast Breeder Reactor 
Program Plan," vols. 1-10, WASH 1101-1110 (1968) : AEC, updated (1970) "Cost-Benefit 
Analysis of the U.S. Breeder Reactor Program." WASH 1184 (January 1972) : and "AEC. 
Proposed Final Environmental Statement, Liquid Metal Fast Breeder Reactor Program." 
WASH 1535 (December 1974). 

2 Thomas B. Cochran, "The Liquid Metal Fast Breeder Reactor : An Environmental and 
Economic Critique" (Baltimore : The Johns Hopkins University Press for Resources for the 
Future, Inc.. 1974). 

3 A. Manne and O. Yu, "Breeder Benefits and Uranium Ore Availability." preliminary 
draft (Oct. 1, 1974) ; and A. Manne, "Waiting for the Breeder," in M. Macrakis (ed.) 
Energy (Cambridge, Mass. : MIT Press. 1973). 

4 The results of this study are summarized in T. Stauffer, H. L. Wycoff. and R. S. Palmer, 
"The Liquid Metal Fast Breeder Reactor : Assessment of Economic Incentives," preliminary 
(1975). The model of the electric utility sector employed in calculating these results is 
described in general terms in this reference, but a detailed description of this model is not 
yet available, and time did not permit me to discuss details of the model with the authors. 
The theoretical justification for the relatively low-base-case discount rate employed in this 
paper. 6 percent, is the subject of another paper, presently in circulation only in prelimi- 
nary draft form : T. Stauffer, "A Generalized Cost-Benefit Calculus for Selecting Alternate 
Energy Technologies," preliminary (Mar. 2, 1975). 



17 

ferences among studies in the modeling of the electric utility sector is 
relatively minor, I believe, and the direction of that minor difference — 
the sign" of the differential net benefits obtained — is predictable and 
consistent with the results of the different studies. 5 

Second, though most economists agree that intertemporal efficiency 
comparisons require the discounting of future costs and benefits, 
there is very little agreement on a particular numerical value for the 
discount rate. One of the studies, Stauffer et al. (1974), argues for a 
discount rate substantially smaller than the rates in the other studies 
and lower than the OMB-recommended 6 uniform rate of discount of 
10 percent. The argument for that lower rate, an argument circulated 
in a preliminary report by Stauffer. 7 is discussed below. 

Third, the various studies are based upon very different assumptions 
about the way in which the R. & D. costs of the LMFBR program will 
be incurred over time. For most of the studies, and some of the cases 
in all of the studies, the net benefit figure is sensitive to this assump- 
tion. The structure of the individual studies therefore restricts, and 
is intended to restrict, both the range of LMFBR program strategy 
options and the broader range of energy policy options which can be 
compared. In particular, a major LMFBK program issue, the '"timing" 
of LMFBR commercialization, cannot be considered at all in most of 
these models, and in the discussion below we will see why. 

Fourth, because of the way in which electricity consumption growth 
is specified, many of the models cannot provide a measure of the rela- 
tive value of supply-oriented energy programs, such as the LMFBR 
program, versus demand-oriented strategies, such as the peakload 
pricing of electricity. One of the models compared here, Manne (1973), 
is very different in emphasis from the others and has been included 
here because it can do this, or at least points the way to the compara- 
tive evaluation of supply-side and demand-side strategies within a 
consistent framework. 



5 All of the cost-benefit studies surveyed here, except for Stauffer et al. (1974), are based 
upon onee-aiid-for-all optimization of electric generating capacity expansion over some time 
horizon extending into the next century. Since Stauffer et al. allow utilities to reformulate 
their plans — as they in fact can and do — during this period, it is conceivable that these 
additional degrees of freedom contribute to a higher net benefit estimate. But Stauffer et al. 
iterate until plans are always consistent with realized time paths, and therefore these 
degrees of freedom may not exist. It is difficult to say without detailed descriptions of the 
model. In any event, it seems reasonably certain that the major factor in the larjr<- net 
benefit figure obtained by Stauffer et al. is the low-base-case discount rate these authors 
argue for, and nse. 

6 Office of Management and Budget, Circular No. A-04 (revised). Mar. 27. 1972. a memo- 
randum on "Discount rates to be used in evaluating time-distributed costs and benefits." 
suggests that a rate of 10 percent be used, except that, "where relevant, any other rate 
prescribed by or pursuant to law. Executive Order, or other relevant circulars" be employed 
The caveat is very likely intended in deference to legally mandated discount rates for the 
evaluation of water resource projects. 

7 T. Stauffer, op. cit., in footnote 4 above. 



THE RANGE AND INTERPRETATION OF NET BENEFIT 

ESTIMATES 

Table -1 compares the five major cost-benefit analyses of the LMFBR 
program. Column (6) of that table shows the net benefits in the "base 
case" — the case rated most probable by the authors — for four of the 
five studies. Those results range from a high figure of S70 billion 1974 
dollars, the base-case net benefit figure computed by Stauffer et al. 
( 1974), to a low figure of $16 billion, the base-case result obtained on 
a comparable basis by the most recent (1975) version of the AEC 
LMFBR program analysis. The figure entered in the corresponding 
column for the Manne (1973) study is not strictly comparable to these 
figures, as noted in footnote h to the table, but is recorded there for 
reasons to be explained shortly. 

With the exception of Manne (1973). all of these studies pose the 
LMFBR. decision problem in the same way. They identify the same 
range of alternatives, and they implicitly suggest that choice among 
those alternatives be guided by aggregate net project benefits. And. 
further, they are similar in that the calculation of costs and benefits is 
based upon internal costs and benefits only. Though AEC (1974) goes 
to considerable length to enumerate the environmental impacts of fis- 
sion power with and without the LMFBR. these impacts are never 
reduced to dollar terms, and they do not enter into the cost-benefit 
calculations. 

To be more precise about the similarity in specification, the cost- 
benefit calculations of AEC (1974). Manne and Yu (1974), and Stauf- 
fer et al. (1975) are a comparison of two future worlds. In the first, 
the range of technologies available for generating electricity includes 
several present technologies but not the LMFBR: in the second, an 
LMFBR R. & D. program adds the LMFBR to this mix of techno- 
logical alternatives at some future date. Assuming that electric utilities 
choose new generating plants by minimizing cost. LMFBR's will be 
purchased when they become commercially competitive, and the costs 
of generating electricity to serve any specified future consumption 
pattern will be lower in every year following the commercial introduc- 
tion of the LMFBR than they would have been without the LMFBR. 
Of course each comparison of these two worlds requires a specific set of 
assumptions regarding the four major uncertainties discussed above. 
but the essential comparison in the three LMFBR cost -benefit analyses 
is between these two alternative futures. Although it is not clear that 
th is is done consistently in all these studies, 1 it is the clear intent of all 
of them. 



1 For example, the AEC cost-benefit analysis appears, for the cases in which HTGR 
capacity is constrained, to calculate net benefits by comparing two cases. In one there is an 
LMFBR and the HTGR is constrained up to the year 2000. while in the other there is no 
LMFBR and the HTGR is constrained up to the year 2000. The correct comparison is. of 
course, one between two worlds differing only in that in one there is an LMFBR and in the 
othpr there is no LMFBR. This possible inconsistency was noted by EPA in their comments 
in the AEC Preliminary Final Environmental Statement. 

(10) 



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22 

Manne (1973) poses the question quite differently, and provides some 
perspective on the definition of this LMFBR/non-LMFBR dichotomy 
and on cost-benefit calculations based upon this dichotomy as guides 
to LMFBR program policy. Below we will see that this seemingly 
innocent change in formulating the question leads to answers differing 
considerably in their policy implications from the more conventional 
analyses. Before turning to this broader LMFBR analysis, we con- 
clude our overview of the more conventional analyses by examining 
the major source of the discrepancies in the net benefit estimates re- 
ported by the three studies: The different discount rates employed. 

The Discount Rate and the Range of Xet Benefit Estimates 

The extreme estimate is the very high base-case net benefit figure 
obtained by Stauffer et al. This high estimate is almost entirely a con- 
sequence of the choice of a relatively low. 6-percent discount rate in 
this model. It can be seen from column (6) of table 4 that all the other 
studies choose a 10-percent discount rate and obtain net base-case 
benefits of the order of $10 billion. Below we shall see that a decision 
to proceed with the project based on benefits of this size easily could be 
reversed by plausible changes in LMFBR program cost assumptions. 

The argument for a 6-percent rate of discount has not been circulated 
in final form by Stauffer. Pending the circulation of a revision of a 
preliminary verson of their paper 2 judgment on these results must 
be suspended. 

Toward a Broader Perspective on the LMFBR Decision 

Rather than comparing futures with and without the LMFBR, 
Manne compares two kinds of futures, both with LMFBR's. In one, 
the date at which the LMFBR becomes available and commercially 
competitive is certain and is set in 1990. (The availability and com- 
mercial competitiveness are identical in Mannes' analysis, though they 
need not be in general and, as we shall see. the difference can matter.) 
In the second scenario, the introduction date for the LMFBR is un- 
certain, and Manne takes for illustrative purposes probabilities of 
0.2. 0.4, and 0.4 for LMFBR introduction in the periods 1988-92, 1993- 
97, and 1998-2002, respectively. Fie then calculates the discounted pres- 
ent value of meeting electricity consumption in these two futures. 

In the case with introduction certain in 1990, the calculation is 
similar to that in the three other studies, while the calculation in the 
uncertain case is clone by finding the pattern of generating capacity 
expansion that minimizes the discounted present value of the expected 
costs of meeting consumption requirements. Naturally, it is more costly 
to meet demand in an uncertain future. The $4.8 billion entry for the 
Manne. study in column (7) of table 4 is the measure of the costs this 
uncertainty will impose upon the economy. Put another way, accord- 
in g to the Manne (1073) calculation, the Nation should be willing to 
pay up to $4.8 billion now for certain "delivery" of the LMFBR tech- 
nology in 1990, given the other assumptions of the study. 



»T. Stauffer. op. clt. 



23 

The LMFBR Timing Issue 

It may be instructive to compare this $4.8 billion figure with the 
LMFBR program cost estimates. Tables 5 and 6 below, identical in 
format but differing in contents, are from two recent government 
documents. Table 5 is from AEC (1974) . the Proposed Final Environ- 
mental Statement, and table 6 is from a recent General Accounting 
Office report 3 to the Congress on the LMFBR program. The two 
estimates of total undiscounted program costs for the period 19T5-2000 
differ by roughly S700 million. (By the year 2000 the LMFBR pro- 
gram is assumed completed with no public money going to LMFBR 
development.) Since table 5 is in fiscal year 1975 dollars and table 6 
in fiscal year 1976 dollars, one might assume that this difference is 
almost entirely due to inflation, but inspection of the differences in 
individual entries makes it clear that inflation cannot be the source 
of all the differences. 

Let us suppose, based on these studies, however, that future undis- 
counted program costs are roughly $S billion. How should these pro- 
gram costs be deducted from the reduction in discounted costs of 
meeting electricity requirements to arrive at a net benefit figure? 
Unfortunately the answer depends upon the time pattern in which 
R. & D. costs are incurred, and there is no agreement upon the time 
patterns of R. Sz D. costs likely to be associated with alternative 
LMFBR program strategies. All of the cost-benefit analyses listed in 
table 4 make assumptions about the time pattern of LMFBR R. & D. 
expenditures which favor the LMFBR net benefit figure, and in most 
cases the result of the net benefit calculation is sensitive to this 
assumption. 

Column (6) of table 4 summarizes the LMFBR program cost 
assumptions, and it is important to renlize that one important range 
of possibilities is excluded from all of them. Scanning column (6), 
one sees that AEC (1974) assumes that the undiscounted LMFBR 
program costs are as shown in table 5. These costs are thus discounted 
to 1975 at the same rate of discount applied to LMFBR program 
benefits, and the difference between the two discounted figures is the 
net LMFBR program benefit. Possibly superior R. & D. timing strat- 
egies are not con-idered here. Implicity. the assumption is that we 
either incur the time pattern of program costs illustrated in table 6 
or we do not get an LMFBR. 

3 General Accounting Office. "The Liquid Metal Fast Breeder Reactor : Program, Past, 
Present and Future" (Apr. 2S, 1975). 



24 



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26 

Manne (1973), as we have explained above, does not compute a net 
benefit figure in the same sense that the other studies do but rather 
estimates the penalty the Nation will pay if, rather than assuring 
LMFBR introduction in 1990, it allows the introduction date to remain 
subject to the probabilistic uncertainties he assumes for illustrative 
purposes. Were all observers in agreement on the probability assump- 
tions which give the $4.8 billion penalty figure in Mamie's example, 
one could compare that $4.8 billion figure with the additional costs 
required to bring the LMFBR program to certain fruition in 1990. 
But without an estimate of what those added costs might be, this com- 
parison — the relevant comparison for comparing alternative LMFBR 
program strategies given a commitment to some LMFBR program — 
cannot be made directly. Since this is not Mamie's purpose he does not 
make this kind of comparison; below we shall consider what such a 
comparison might indicate. 

In Manne and Yu (1974) there is no explicit treatment of LMFBR 
program costs and consequently no explicit treatment of corresponding 
alternative LMFBR timing strategies leading to commercially com- 
petitive reactors in different years at different costs. But this range of 
alternatives can, in principle, be compared within the framework of 
this model. The assumption on capital cost differentials of Manne and 
Yu (1974) defines the date at which the LMFBR becomes commer- 
cially competitive and therefore defines an optimal introduction date 
for any given LMFBR program cost assumption. Introduction of the 
breeder at any later date imposes a power cost penalty which, when 
weighed against the development cost reductions associated with 
stretched -out LMFBR development strategies, defines an optimal or 
least-cost LMFBR program strategy. 

Finally, Stauffer et al. define net benefits gross of R. & D. costs ; since 
their results for net benefits thus defined are so much larger than their 
estimates of future LMFBR R. & D. costs— they cite $5-$10 billion in 
costs but specify no time pattern — the question of LMFBR develop- 
ment timing cannot be raised in their framework. 

In summary, none of the LMFBR cost-benefit studies which com- 
pare a world without an LMFBR to one with an LMFBR is structured 
so as to answer questions about the best timing strategy an LMFBR 
program might pursue. Consequently, they give the same answer to the 
question of the optimal timing the LMFBR's commercialization: as 
shown in column (9) of table 4. Earlier introduction dates always give 
higher net benefit figures, and the optimum commercialization date is 
the earliest feasible date. 

It is relatively easy to see that this result is a consequence of the 
assumption that the time pattern of LMFBR program costs is not a 
"decision variable," i.e., that there are no alternative LMFBR program 
strategies with different time patterns of R. & D. costs, or that LMFBR 
program costs are necessarily higher the longer the introduction is 
delayed. It is easy to demonstrate that, once the distinction is drawn 
between "availability date" (the date at which some LMFBR tech- 
nology is "on the shelf") and "commercialization date," (the date at 
which the LMFBR generates electricity more cheaply than alternative 
technologies), and once there is a range of R. & D. strategies with dif- 
ferent associated time patterns of cost, it is no longer true that an 



27 

earlier LMFBR introduction elate always increases net benefits. To 
the contrary, there will be an optimum introduction date, and what has 
been called an "LMFBR timing" issue arises. 4 

The LMFBR program as presently constituted is an enormous and 
complex undertaking — indeed some observers believe that it is orga- 
nizationally too complex to operate effectively. 5 One should not under- 
estimate the difficulty of guiding the strategy of such an enterprise 
using cost-benefit criteria. But if cost-benefit calculations are to be 
applied to the program as a whole, then it seems reasonable to ask 
that some alternative program timing strategies be analyzed, and none 
of the major studies do this. It might even be argued that such an 
assessment of broadly defined alternative program strategies, rather 
than provision of a single number or set of numbers as an evaluation 
of the program, is the role for which cost-benefit analysis is best suited. 



4 Sf>e appendix to this study. 

3 See the remarks on LMFBR program structure and program performance in General 
Accounting Office, op. cit. 



•CONCLUSION: THE PURPOSES AND LIMITS OF 
ANALYSIS 

The energy R. & D. budget is limited, and energy R. & D. programs 
are among our major instruments for broadening our energy supply 
options and thus for widening the range of futures we will have to 
choose among and live within. But framing that allocation problem in 
ways that are useful as guides to energy R. & D. policy is exceptionally 
difficult. A correct understanding of the range of alternative futures is 
required, and that understanding turns on identification of variables 
determining those futures which are either under control or can rea- 
sonably be brought under control. That choice of variables limits the 
range of strategies among which we can choose and influences ranking 
of those strategies. Finally, we need criteria in order to choose among 
alternative futures; criteria applicable when we are certain that par- 
ticular strategies will lead to particular futures, and criteria for pro- 
ceeding when uncertainty obscures the linkage between present 
strategies and alternative futures. 

In order to slice into this circle of circumstance and choice, it is 
necessary to limit the full range of possibilities to a smaller range 
and then to introduce simple criteria for choice among these plausible 
futures. All of the cost-benefit studies of the LMFBR we have sur- 
veyed do this, and all do it in ways that are very similar. There can 
be no quarrel with the necessity of this reduction. But the particular 
range chosen and the particular criteria chosen for the guidance of 
choices among those alternatives, if overly narrow and/or excluding 
some major alternatives, can seriously constrict our view of the op- 
tions open to us and of the strategies available to us for broadening 
those options. 

The Range of Alternatives 

Here an illustrative example may be useful in sharpening the moral 
of the LMFBR timing issue story. A slight change in the range of 
alternatives considered can lead to a. significant change in program 
evaluation. All the major LMFBR cost-benefit analyses we have sur- 
veyed, except for Manne (1973), compare LMFBR and non-LMFBR 
futures and therefore focus entirely upon energy supply-side alterna- 
tives. Only Manne (1973) attempts a comparative evaluation of the 
payoff to one major demand-side energy measure, the peakload pricing 
of electricity, and the numerical results are strikingly larger than the 
computed payoffs to LMFBR development. 

Manne computes many cases, but one can be taken as illustrative. 
Under the assumptions summarized in table 4 the cost savings from 
certain 1990 availability of the LMFBR are roughly $4.8 billion, while 
the generating capacity cost savings from improved pricing of peak- 
demand period electricitv — a halfway version of peakload pricing — 
are roughly $38 billion. There is some danger of misinterpretation in 

(28) 



29 

citing these two figures for comparison but not, I think, as much dan- 
ger as there is in leaving out this kind of comparison. The point is 
that the economic benefits from removing one of the major distortions 
in energy pricing are significantly larger than the economic costs we 
may incur by delaying the introduction of the LMFBR. 

There is overwhelming evidence suggesting that we have, in the 
past, and especially in the recent past, systematically underestimated 
the difficulties in supply-side energy strategies, whether these be solu- 
tions involving previously unexploited exhaustible resources or the 
introduction of new energy technologies. The expansion of LWE 
capacity has been significantly slower than was foreseen 5, 10, and 
20 years ago. In the light of this history the projected LMFBR pro- 
gram schedule seems optimistic. There are numerous technical dead- 
lines to be met, the number of demonstration plants that will be re- 
quired before full commercialization remains uncertain, and there 
is little that can be said with assurance about the licensability of the 
ultimate commercial LMFBR. Given the technological and institu- 
tional constraints and uncertainties surrounding supply -side solutions, 
it seems imperative that supply-side solutions be explored and evalu- 
ated in a framework allowing consistent comparison with demand-side 
energy strategies. 

The Limits of Analysis 

Finally, many of the opponents of nuclear power — in their argu- 
ments against a commitment to an expansion of nuclear power, both 
LWPv's and LMFBR's, stress the problem of intertemporal equity, 
especially the unresolved problems of disposing of long-lived actinide. 
Because plutonium and the other actinides have half-lives ranging 
into the hundreds of thousands of years, the possibility of an enormous 
transfer of environmental costs onto future generations cannot be 
entirely ruled out short of a resolution of the waste disposal problem. 
In this case, the earlier generations benefiting from fission clearly 
cannot compensate later, unluckier generations, and the cost-benefit 
criterion loses both its regorous basis and its aura of fairness. This 
is a dilemma that cannot be resolved bv cost-benefit analysts. Decisions 
that may involve significant nontransferable gains for some and major 
noncompensable losses for others are decisions that should be made 
in the final analysis by legislatures and courts, arenas in which poten- 
tial losers can get a hearing. While the future cannot represent itself, 
we can and do on occasion arrange for decision rules and processes that 
make thetime perspective of the decision either shorter or longer. 
The definition of appropriate institutions and procedures for nuclear 
decisionmaking requires more serious and precise thought. 

I do not believe that this dimension of the problem has received 
due consideration in our public deliberations, most of which have been 
concerned with particular aspects of the nuclear fuel cycle. Short of 
tackling these broader aspects of the problem, the stalemate over 
nuclear power is unlikely to be broken. 



APPENDIX 

Here is a simple example: There are two technologies (1, 2) for meeting some 
constant demand over some finite time horizon T. Technology 2, the "LFMBR," is 
initially expensive than technology 1, the "LWR." But with learning — assumed 
proportional to operating time — technology 2 becomes cheaper. To "buy into" 
technology 2 there must be a one-time payment, P, of R. & D. funds. That payment 
and the switchover to technology 2 define a, the "availability" date. The commer- 
cialization date, c, is the date at which technology 2 expenses have been "learned 
down" so that technology 2 is competitive with technology 1. Summarizing and 
setting out the model : 

Ci (d) = total cost of meeting demand d with technology 1 

C 2 (d, *-a)=total cost of meeting demand d, with technology 2, at (t-a) after 
the availability date a 

T=time horizon of problem 

P= one-time R. & D. payment at a for "availability" of technology 2 

r= social rate of discount 
Then the problem of meeting demand d at minimum present value of cost is : 

mm a Z 
where 



(1) 



=J°e-"C 1 (d(t))dt + Pe-T°+j^e-"C2(d(t), t-a)dt 



The corresponding first-order condition — =0 implies 



(2) 



C l (d(a))-rP-C 2 (d(a), <))+«'• PW" ^SiMlJ r ) =0 

Ja da 



If we take a simple explicit form for the time dependence of C — one consistent 
with the assumption that technology 2 costs are reduced over time due to learn- 
ing to a level below technology 1 costs, such as 

(3) C 2 (d(t) } t-a) = (C 2 (d(t))(l + ge-^-*)) 

where 0>O, h>0 are constants parameterizing the effect, then the integral in 
(2) can be explicitly evaluated, and an analytical solution can be obtained for 
the optimum availability time a* : 



(4) 



*-* +A"M¥)( fl= aF a )) 



From this model one can see how changes in capital cost differentials (Ci-C s ), 
learning rate assumptions {g, h), R. & D. costs (P), and the discount rate (r) 
affect optimal timing. The important point for our purposes is that there is a 
timing issue, and that there will be one in any model that specifies the range of 
alternative program strategies somewhat more broadly than most of the studies 
surveyed here. 

(30) 

o 



UNIVERSITY OF FLORIDA 

ii i I ll I I I II M 



3 1262 05391 0948